Saving Big for College?

Posted April 28, 2025, By Cole Ferrier

529 plans are rightly celebrated as powerful tools for education savings. Their tax-deferred growth and tax-free withdrawals for qualified education expenses make them a cornerstone of college funding strategies. Most families open one 529 account per child and choose an investment path, often an age-based option. But a common question arises: "Can I open more than one 529 plan for the same child?"

The simple answer is yes, absolutely. There's no federal limit on the number of 529 accounts per beneficiary. While aggregate contribution limits apply across all accounts for that beneficiary (set by individual state plans, often exceeding $300,000 - $500,000), you can indeed have multiple accounts.

A Scenario: Aiming High, Saving Big, and Fearing Leftovers

Before diving into why you might strategically use two accounts, consider this common scenario: Imagine diligent parents with a newborn child. Looking decades ahead, they hold the wish that their child will eventually pursue a high-cost graduate degree, like medical or dental school. Knowing these programs can cost hundreds of thousands of dollars on top of undergraduate expenses, they commit early to an ambitious savings plan within a 529, aiming to accumulate a very large sum – perhaps $400,000 or more over the next 20-plus years.

Their concern? What if their child excels in undergrad but decides not to pursue the advanced degree, opting instead for a career path that doesn't require it? Suddenly, these parents face the prospect of having significantly over-saved within the 529, potentially by $200,000 or more.

While recent rule changes (SECURE 2.0 Act) introduced welcome flexibility, allowing penalty-free rollovers from a 529 to the beneficiary's Roth IRA, this option has limitations. There's a lifetime rollover maximum (currently $35,000) and annual limits tied to the IRA contribution limit for that year. For parents with substantial six-figure sums leftover, this rollover provision, while helpful for smaller amounts, will not materially solve the problem of significant over-saving. It only addresses a small fraction of the excess funds in our scenario.

This potential for large leftover balances, where current solutions aren't fully adequate, is a key reason some families explore more advanced 529 strategies. It highlights the need to think critically about optimizing growth and managing potential excess funds down the road. One such strategy involves using two 529 accounts with distinct investment goals.

The Core Idea: Segregating Growth Potential

Asset location, in this context, means strategically placing different types of investments into different accounts to optimize for factors like taxes or growth potential. When applied to using two 529 plans for one child, the goal is typically to:

• Designate one 529 account (Account A) for high-growth potential assets: This account would be heavily weighted, perhaps even 100%, towards equities (like broad market index funds). The aim is for this account to capture significant market appreciation over the long term. Although you may eventually need to derisk this account by moving funds to conservative investments, it is initially designed to capture the bulk of the appreciation.

• Designate a second 529 account (Account B) for lower-growth, more stable assets: This account might only ever hold bonds or stable value funds.

Why Would You Do This? Focusing on the Over-Saving Challenge

Given the scenario of potentially significant over-saving and the limitations of tools like the 529-to-Roth rollover for large excess balances, how does the two-account strategy specifically help? The potential benefits center on strategically managing those leftover funds, while also leveraging the inherent advantages of the 529 structure:

• Setting the Stage by Concentrating Gains: The foundation of the strategy is intentionally trying to make most of the investment growth happen in Account A (the aggressive one). This maximizes the potential for tax-free growth if used for qualified expenses and also means Account B (the conservative one) is designed to have minimal gains relative to contributions, which is key for the over-saving strategy.

• Tax Deferral Benefit in the "Safer" Account: Even Account B, the low-growth account, offers a distinct advantage over simply holding safer assets (like bonds or stable value funds) in a standard taxable brokerage account. In a taxable account, the interest and dividends generated by these assets are typically taxed each year, creating a drag on growth. Within Account B, however, these earnings grow tax-deferred. This means you don't pay annual federal income taxes on the interest or dividends earned inside the 529, allowing even safer assets to compound slightly more effectively over time.

• Strategic Withdrawals for Qualified Expenses: To leverage this setup for potential over-saving, the plan involves using funds from the high-gain Account A first whenever paying for qualified education expenses. This ensures that the tax-free nature of 529 withdrawals is applied primarily to the account where the most appreciation has occurred. It's crucial to consistently prioritize withdrawals from the high-gain account for QEE for this over-saving management strategy to be effective.

• Mitigating Taxes & Penalties on Leftover Funds: This is the key payoff for the over-saving concern. If the child finishes their education (e.g., only undergrad) and a large sum remains, having drawn down Account A leaves the bulk of the excess funds likely sitting in the low-gain Account B. When taking non-qualified withdrawals of this remainder, taxes and the 10% penalty apply only to the earnings portion. Because Account B was designed for low growth (and enjoyed tax-deferral along the way) and was potentially depleted of some earnings via strategic QEE withdrawals, the taxable earnings portion of a non-qualified withdrawal from Account B could be substantially smaller than if all funds were mixed in a single account. This directly addresses the parent's fear in our scenario, potentially resulting in significantly lower income taxes and penalties on the large leftover sum compared to a single-account approach, offering a measure of control beyond the limited Roth IRA rollover.

Essentially, the two-account strategy provides a framework to intentionally isolate gains, benefit from tax deferral even on safer assets, and strategically spend down for qualified needs, leaving potentially large leftover amounts in an account structured to minimize the tax impact of non-qualified distributions.

Important Considerations and Potential Drawbacks

This strategy isn't for everyone and requires careful thought:

• Increased Complexity: Managing two accounts means more statements, potentially more fees, and requires diligence in tracking allocation and executing the withdrawal strategy correctly.

• No Guarantees: High-growth investments carry higher risk and don't guarantee outperformance. The success of minimizing taxes on non-qualified withdrawals depends on achieving a significant difference in gains between the accounts and adhering to the withdrawal plan.

• State Tax Implications: If your home state offers a state tax deduction or credit for 529 contributions, it typically only applies to contributions made to the in-state plan. Splitting funds between an in-state and an out-of-state plan might reduce this benefit. Research your specific state's rules.

• Aggregate Limits Still Apply: Overall contribution limits ($235,000 to over $575,000 depending on the state plan) are per beneficiary across all 529 accounts.

• Is it Worth the Effort? For many families, a single, well-diversified 529 plan is sufficient and simpler. Weigh the potential benefits against the added complexity, especially considering the discipline required.

Who Might Benefit Most?

This approach might be most appealing to:

• Families planning substantial contributions over many years, potentially aiming for high-cost graduate programs like in our scenario.

• Savers comfortable with managing multiple investment accounts and disciplined execution.

• Those with a long time horizon where gain differentials might become significant.

• Individuals highly concerned about the tax implications of significant over-saving and seeking strategies beyond the scope of the current 529-to-Roth IRA rollover limits ($35,000 lifetime, subject to annual limits).

Conclusion

Yes, you can absolutely use two 529 plans for one child. Employing an asset location strategy between them – dedicating one to aggressive growth and the other to stability – is a sophisticated technique. When viewed through the lens of ambitious savers concerned about significant over-saving (like those funding potential medical school dreams), this strategy offers potential mechanisms – including tax deferral on safer assets and mitigation of taxes/penalties on large leftover balances – that work alongside, but go beyond, the capabilities of the 529-to-Roth IRA rollover or single-account approaches.

However, it introduces complexity and requires careful planning and disciplined execution. It's crucial to understand your state's specific 529 rules and honestly assess if the potential advantages outweigh the added effort compared to a simpler, single-account approach. Before implementing advanced strategies, consider discussing your specific financial situation and goals with a qualified financial advisor.